The Promise of Microfranchise: Leapfrogging a Decade

by Deborah Burand: Wednesday, August 19, 2009

The Wall Street Journal last week reported that, while franchising growth in the United States has slowed this past year due to the credit crunch, US franchises are growing by leaps and bounds in countries like Brazil, India, China, Central and Eastern Europe.  Stories like these can make you wonder when microfranchise will take off too in these countries. 

As others have noted, microfranchise today is where microfinance was 10 years ago. Many of the hundred or so microfranchises in the world now have yet to demonstrate their potential to reach scale on a financially sustainable basis. Moreover, the development of best practices and a consensus on financial and social performance measurements for benchmarking and evaluating the performance and transparency of microfranchises is lagging far behind that of its cousin, microfinance. Related, the pool of capital available for financing microfranchises is very underdeveloped. Finally, like microfinance of  a decade ago, most microfranchising is taking place under the radar screen of any regulatory authority.

So what is needed to help microfranchise leapfrog the next decade so as to move from the world’s 100 or so existing microfranchise networks, many of which are financially unsustainable, to reach 10,000 microfranchise networks? 
Another way to answer this question is to ask:  what does the microfinance sector now enjoy that the microfranchise sector is missing?  Here are at least four obvious gaps that deserve further research:

  1. Lack of a reputable resource center for sharing experiences, conducting and sharing impartial research, setting standards (financial and social) for sound practices in microfranchising, rewarding transparency within microfranchise networks, and establishing benchmarks for evaluating performance of microfranchises  (see, by contrast, roles played by www.cgap.org, www.mixmarket.org,  and the www.microfinancegateway.org  in the microfinance sector);
  2. Lack of financially sustainable/investment-ready microfranchise networks capable of attracting socially responsible investors willing to devote sizeable amounts of risk capital to scaling microfranchising;
  3. Lack of technology platforms and management information systems that can support supply chain/product management for scaling microfranchises; and
  4. Lack of enabling legal and regulatory environments capable of supporting large scale microfranchises (and ensuring appropriate protection of the interests of microfranchisees).

And what if these hurdles were addressed so that microfranchise could leapfrog a decade and move to scale rapidly?  More microentrepreneurs might bridge the gap between micro- and small/medium enterprises, thereby putting a sizeable dent in  the “missing middle.”  And, equally importantly,  more of the working age children of today’s microfinance clients might find a way to put their hard earned educations to work by finding employment opportunities in microfranchises.  In short, microfranchise might hold an important key for helping to “graduate” microentrepreneurs and their children into small business ownership.

TAGS: , , , , , ,

Comments: Comments and trackbacks are open.

7 Comments RSS 2.0

  1. August 25th, 2009 at 12:36 pm, Deborah Burand ()

    So some of you have been emailing me to ask for a definition of “microfranchise.” And you have likely been frustrated by my non-answer. Lest I leave you frustrated and alone, here are my thoughts about the challenges with defining microfranchise, so you can be frustrated with a lot of friends.

    Microfranchise suffers from the same definitional challenges that many attempts at defining microfinance face. And in some ways it is even more difficult to pin down what constitutes a “microfranchise.” Do we define microfranchise by the size of the microfranchise? By the wealth of the microfranchisee? By the target customer base of the microfranchise? By the owner of the microfranchise network/microfranchisor? By the business model of the microfranchise?

    I think the more pertinent question, given the nascent state of microfranchise, is this: What do we lose if we make this definition too narrow versus what do we gain if we keep the definition rather loose and perhaps overly expansive?

    For now, I am opting for a very fluid and expansive definition.

    What do you think?

    Cheers

    Deborah

  2. September 2nd, 2009 at 6:26 am, Markus Dietrich ()

    Dear Deborah,

    Having studied the microfranchise sector in theory and practice I can add a few comments to your gap analysis:

    Gap 1: Resource Center:

    There is actually one microfranchise resource center at the BYU-Marriott School where Jason Fairbourne has set up the microfranchise development initiative (http://marriottschool.byu.edu/selfreliance/microfranchise/about.cfm). He also edited “Microfranchising: Creating Wealth at the Bottom of the Pyramid”, a comprehensive overview of the nascent sector.

    Gap 2: Microfranchise Model

    I agree with you that there is a distinct lack in microfranchise business models that are ready for scale up. Even the successful “case study” franchises have not really scaled up. One of the reasons could be the problem of the franchise fee which is set low to enable the franchisee to become profitable. However, the low fee does not cover the cost of the HQ let alone making it profitable, therefore there is no incentive for franchisors. On a positive note, I have recently seen more BoP business plans incorporating franchise elements.

    Gap 3: Technology and MIS

    I agree, lack of data is a huge problem, especially for franchise companies in the supply chain and distribution sector, where it has a lot of potential. Having worked with a BoP distribution company I found that the major stumbling block is not the technology, for example a POS system, but the mindset of the BoP user who does not see a value in abstract data and does not support the system.

    Gap 4: Legislation

    I do not believe that we need special legislation for microfranchises. What is missing is good legislation for transitioning from micro (ie informal) to small (ie formal). If microfranchise as a concept has the ambition to be a stepping stone for graduation, it has to tackle this issue, as often there is no incentive, but huge disincentives, for microfirms to become small and formal.

    From a theoretical point of view there is a compelling case for microfranchises as a business model. Equally compelling is the case of microfinance institutions using microfranchises as a graduation business development service.

    I see the major gap in the lack of microfranchise business models and I suspect that they cannot be downloaded from existing models but need to be invented anew. To do this, I am starting the Asian Social Enterprise Incubator in the Philippines which will, among others, work on franchise business models because I do see a huge potential in it.

    I am happy to discuss this issue in more detail.

    Thanks Deborah for bringing it up at cgap.

    Kind regards

    Markus Dietrich
    markusdie@gmail.com

  3. September 5th, 2009 at 1:05 am, Deborah Burand ()

    Markus: Thanks for your thoughtful response. I agree that Jason Fairbourne and his colleagues at BYU are doing great work in gathering and publicizing information about microfranchise. And, like you, I would recommend that folks interested in microfranchise check out the BYU website. While different in purpose, content, and focus than resource centers like CGAP or the Microfinance Gateway, I have found that site to be very useful to my research on microfranchise.

    Very interested in hearing what you accomplish in your Asian Social Enterprise Incubator in the Philippines\ and the microfranchise business models you help advance. Good luck!

    Cheers

    Deborah

  4. September 22nd, 2009 at 7:27 am, Peter van Dijk ()

    Dear Deborah and Markus,
    The topic of Microfranchise is an important one as it always has been a “hidden” part of discussions and activities in Microfinance.
    NGOs, banks or specific MFIs that at one point in time were successful by whatever performance indicator collected, and received a lot of media attention, receive many invitations for visits, incoming and outgoing. Some even established themselves as internationally active foundations or financial institutions to copy their model.
    In my experience microfinance can be considered as retail banking, depending for sustained success on (many small) local depositors and margins made from local borrowers and transfers. As IMF and WB studies confirm, success in retail banking depends on local relationships and calling and presenting them as local.
    We know that where international MF supporters such as FINCA, CARE, ACCION or others became successful, the locals desired to change the names of “their” institutions.
    As you have worked with such possible “franchises”, FINCA and Grameen Foundation, what do you think of my arguments Deborah. Thank you for your work on this initiative. Kind regards, Peter

  5. November 18th, 2009 at 1:51 am, Mike Tyler ()

    Dear Deborah, Mark and Peter,
    I have just stumbled on your very interesting exchanges.
    I am trying to identify, or help start up of microenterprises in developing countries, suitable for replication by a very simple ethical microfranchise system. (www.aidfortrade.org.uk)

    I would like to see microfranchising defined by the cost of start up:
    Informal sector (Unregistered Home based) $400
    Formal sector (Registered Group enterprise or one with any employees)
    $5,000. Does this make any sense to you?

    I wonder if you might know of any suitable micro businesses which I might be able to contact, as I am offering $150 for full details of any successful microenteprise willing to become a model for replication, to be featured on our website. By ’successful’ I feel the business should have been operating for over two years and be generating at least the average national income for the owner.

    If you have any contacts or suggestions on this they would be most welcome - safest to email me (miketyler@aidfortrade.org.uk ) as I am not too good at revisiting sites/blogs.

    Thank you
    Best regards
    Mike Tyler

  6. December 17th, 2009 at 9:56 am, Everything You Need to Read: Introduction to Microfranchising, Social Enterprise, BOP « ()

    [...] The Future of Microfranchising Deborah Burand blogs on CGAP website about why microfranchising is where microfinance was 10 years ago. [...]

  7. January 7th, 2010 at 9:33 pm, gmarris ()

    gmarris…

    any other type of business!…

Leave a Reply